Ask a Canadian: The Housing Market

There is no other way to say it: the Bay Area housing market is insane--even if you’re from Toronto or Vancouver where real estate isn’t cheap.  The cost of living in the Bay Area is the third highest in the world (Toronto and Vancouver are 26th and 27th respectively in North America) and housing drives a lot of this.

It can be very difficult to get your mind around this: when we moved here 25+ years ago we saw houses in our Berkeley neighborhood listed for +/- $250,000.  I remember thinking “A quarter of a million dollars! Who would pay that for anything?”  (We’d moved from Toronto that was in a recession and a protracted real estate slump).  Now that sum wouldn’t buy you a garden shed in most Bay Area communities.

 

 

Some Background  

You are moving to a State whose population alone is a little more than all of Canada and only 1/20th of the area (even if you count only a 100 mile strip north of the American border, where most Canadians live, California would be 1/5th the size of Canada). California's economy alone would rank 5th in the world if it were a sovereign nation (Canada is 10th). The Bay Area clocks in at 7 million people, rivaling Canada’s greatest urban centre, the mighty Toronto (the population of the Greater Toronto Area was just under 6 million back in 2016). 

Prices in California have steadily moved ahead of the rest of the nation since World War 2, especially in the Bay Area; it is difficult to  see this changing anytime in the near future for a number of reasons.

First, the tech boom does not appear to be waning, with its latest manifestation being a flood of Unicorn millionaires expected this year as their companies go public.

Second, California is (still) a desirable place to live, especially for educated highly skilled folks.  Even though the State has net out migration to other States, more highly skilled workers move in than leave and the State takes in a lot of immigrants, ensuring that the population continues to grow.

Third, we’re not building as much housing in the State as we need to to meet demand.  It is difficult to imagine prices going down with demand staying strong and supply weak.

These factors result in folks bidding well above asking prices on rentals or purchases; folks sharing home and rental price information with total strangers at social events like they were stock prices (which they sort of are); longtime owners or renters of rent controlled apartments (where they exist) seeming rather relaxed and low key, wise for getting into the market so long ago, and above all the stress (if they bought or rented 10+ years ago, their cost of housing will be less than half of yours).

 

Keep This In Mind

A few contextual items that may help you understand the Bay Area Housing Market.

 

Americans Like to Buy a Lot of House.  I spent many years traveling to sunbelt cities on business e.g. Atlanta, Dallas, Houston) where a 4,000 square foot, three car garage for a family of 3 or 4 on a ¼ acre is not uncommon. Averages (which tend to understate things) show Americans live in 2,600 square feet and Canada at 2,200 square feet.  House sizes in both countries have grown steadily even as the number of occupants per house have declined. 

This applies and doesn’t apply to the Bay Area: if you’re buying or renting something new, it will be tricked out with all the latest amenities but it is quite possible to pay a very high price for an older house that lacks amenities.  You will likely see 50 year-old bungalows with one bathroom or older apartments with dated kitchens.

 

Mortgage Interest is Tax Deductible. Sort of.  Trump’s tax reform, a couple of years ago, capped this (and capped the deduction of state and local taxes) from federal tax returns but it is still a significant part of the psychology of buying houses here. Folks are adept at doing the math to know what the all in, after tax cost of purchasing a house will be and think nothing of leveraging themselves to the hilt to do so.

The Variety of Purchase Financing is Huge.  Finance is highly competitive here, so you can lock in a rate on a mortgage for 30 years and refinance it without a penalty if rates drop (which many people do.)  Loans that helped brew the financial crisis 12 years ago - so called “Liar Loans” - are coming back.  These require no income or job verification, little or no down payment and often have low teaser rates that jack up every couple of years.  What could possibly go wrong? 

Your Credit Score Matters.  Your credit here is a big deal and will sway what you can rent or how much you can borrow. Because the U.S. and Canadian credit systems are siloed it would be wise to start building your credit record here as soon as you can (open a bank account, get a couple of credit cards, take out a Liar Loan). *If you think you are going to walk into a lender's office and get approved for a million dollar mortgage when you arrive on American soil, think again. Unless, of course, you are prepared to buy a house with cash in full.You have no credit history here and therefore, no credit rating. 

Earthquake Insurance Isn’t Mainstream.  Earthquake insurance is both expensive and optional.  I know many folks that do not bother with this on the assumption that when the “Big One” hits there will be some sort of government program to bail home owners out and/or if they have refinanced up to the home’s current value, having extracted all of their equity, they’ll be able to walk from the mortgage obligation.  I am not so sure.

Transaction Costs on Home Purchases Are High.  Brokers charge 6% on purchase/sales transactions (this can be negotiated), higher than even the quoted rate in the Toronto market (other provinces, like Alberta, are much lower.)

Real Estate Taxes Are Locked In at Purchase.  Proposition 13, passed in the ‘70s ensured that property taxes would be tied to the purchase price and only be raised at about 1% a year. This means that your retired neighbour living in a bungalow she has owned for 30 years, may pay a fraction of the taxes you do on the house of similar vintage you just purchased.

Some Suggestions

Educate Yourself About Housing Costs Before You Come.  Be super aware of the cost of buying or renting here when you negotiate your salary and before you make your move.  Your salary will look sweet, especially when converted to the Hudson’s Bay Peso, but your bank or landlord will be getting a good piece of it. There are a load of great sources, including ZillowTrulia and innumerable brokers’ sites.

Rent First.  Get to know the Bay Area generally and the local markets you are interested in without buying in straight away.  If you’re single it is super common to share a place with other folks, particularly in San Francisco.  You’ll be able to take time to figure what towns/locations make sense here for you: the variety is significant and difficult to map from afar.

Additionally, this will enable you to see if the Bay Area is going to stick.  We think that it is a fantastic place to live but you may not: the lack of Tim Horton’s or Mackintosh’s Toffee may grate you. Or the fact the money is all the same color and there are no Loonies may be a deal killer.

Avoid the Hype.  Be disciplined and realistic about what you can afford to rent or buy.  Many of us would like to summer in Europe and winter at Whistler, few of us can actually afford to.  Your house/apartment is just a place to shelter yourself (and your family).  Of course, this is easier said than done: the choice of a home or apartment can bring out the best (and worst) of our primal instincts about taste, community, family etc. but try to stay the course and on budget.

Keep Your Housing Costs In Line.  Keep your housing cost as a percentage of income within reasonable bounds.  The usual rule of thumb is that housing expenses shouldn’t be much more than 30% of your total household's monthly income. You at least want this ratio below 35%, allowing for a Bay Area premium.

Lean Towards Buying If You’re Going to Be Here a While.  Say, more than five years.  When it comes to investing, time is your friend.  A longer time period - even with ups and downs - will help you with housing challenges and the enormous price you’ve paid for your home.

Think About Your Housing Costs as ½ Investment ½ Living Expense.  Folks get muddled considering their house as an investment:  so many of the reasons you rent or buy a specific place are personal, emotional, i.e. non finance related.  These are all very good reasons to choose a place but may not be good reasons to invest.

Look for Simple Pleasures.  Regardless of where and how you choose to live here in the Bay Area, look for the simple pleasures, which are many (e.g. weather, easy access to amazing parks, unsurpassed access to fresh food, wine country, Tahoe, the ocean), gently moving yourself away from the idea of owning or renting or buy the perfect place.

If You’re Going to Buy, Go For It.  It can be exhausting to chase houses; trolling MLS listings, hitting multiple open houses, agonizing over this place versus that place  (we did it far too long before we got serious about buying), so if you are planning to buy, bid enough to win.

 Hugh Morgan grew up in Calgary and has lived in the Bay Area for 27 years.  He’d be delighted to answer any questions you have about life in the Golden state: you can reach him at hugh.r.morgan@gmail.com.

The views, thoughts and opinions expressed in this article are solely those of the author (s) and do not necessarily reflect the views, policies or positions of the Digital Moose Lounge.